Investing

Investing Idea - Dividend Growth

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  • Aug 11th, 2018 6:08 pm
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AdsJoint wrote:
Jan 21st, 2018 10:50 am
I have two very simple, noob questions and will appreciate if anyone can advise me.
1. If the average return from dividend stocks/etfs portfolio is less than 4% then why even bother with it when market index funds can return 7%?
2. If YOU were to start creating your dividend portfolio today in a RRSP account with only $10000, what stocks or ETF (s) would you buy and how many?
The average return is not less than 4%. That's the dividend return. Total return is dividend return + capital appreciation. The less than 4% is considered as a "fixed salary" that you get regardless of what the market does. It generates cash that can be reinvested or spent. Buying quality companies when attractively priced takes care of the capital appreciation. When you combine both, you do better than index funds, because with index you don't control the portfolio (you buy good and bad companies), you don't control valuation (you pay market price for everything) and you pay MER.

Also, don't let the low yield to fool you. With an approach based on dividend investing, it's not just a less than 4% yield. It is a dividend stream that starts at , say 3% and grows, say, at 7% per year. Buy $100,000 of it and the year one dividend is $3,000. Compound the 7% growth for 30 years and the year 30 dividend is about $24,000. if the stock still yields 3% you've got a big capital gain. If it now yields 6% at year 30 because interest rates went up, the stock part is you've still got a quadruple in capital gain. The key is to monitor the safety of the dividend and the growth rate and trade into something else with better prospects if it no longer meets your goals for dividend and growth. Remember, in the end, for dividend growing companies, earnings drive stock price.

For example, take a traditional dividend grower, Canadian National Railway (CNR.TO). Its dividend is typically 1.6%, at any point that you buy. But look how earnings growth (orange line) drive stock price growth (black line). And look how dividends (white line) drives the portfolio yield overtime. CNR's annual return for the last 20 years is an impressive 15.9% per year, while indexing is much lower. BTW, that doesn't mean that indexing investing is not a good strategy, it's different, tailored for other purposes, with its own pros and cons, like DGI has its own pros and cons.

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2. I personally wouldn't buy any ETF. I would choose between 5 and 10 stocks. You could pick stocks from different sectors for better diversification. On my RRSP, I only hold US stocks, since RRSP is the only vehicle where withhold tax doesn't apply. My goal is to live off growing income and never need to sell shares to produce that income, hence I let it compound so that a smaller portfolio can produce enough income to retire - but not every goal is the same. Some people prefer growth stocks to maximize total return and then when they're ready to retire they can build an income portfolio. Again, each strategy has pros and cons. What is are your goals, what kind of portfolio do you want on your RRSP? Do you want to hold Canadian or US companies? I'd first build a list of quality companies that meet your criteria to partner with the business. That doesn't mean they're all good buys, as some might be overvalued. Once you have a list of quality companies, then you can focus on valuation, one company at a time.

I'm in the process of reviewing my watchlist, and I'll shrink from what I have today. Part of the rationale to why I have such diverse list was to have different risk / reward exposure to have income growth and maximize total return. However, since I have my own trading models focused on growth and income, I'll narrow down the list with more strict quality aspects, and will change my rules to cease partnership to be more strict as well, and not wait so long. In the end, you need to build a list and have clear entry and exit rules for whatever strategy you pick. Also, you need to decide if you want to invest the $10,000 at once or if you'll dollar cost average and add slowly.


Rod
Last edited by rodbarc on Jan 23rd, 2018 10:21 am, edited 1 time in total.
Build a comprehensive portfolio based on Investing and Trading strategies. Check out these threads and join the discussion:

Investing strategy based on dividend growth

Trading strategy based on Graham principles.
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rodbarc wrote:
Jan 23rd, 2018 10:21 am

2. I personally wouldn't buy any ETF. I would choose between 5 and 10 stocks. You could pick stocks from different sectors for better diversification. On my RRSP, I only hold US stocks, since RRSP is the only vehicle where withhold tax doesn't apply. My goal is to live off growing income and never need to sell shares to produce that income, hence I let it compound so that a smaller portfolio can produce enough income to retire - but not every goal is the same. Some people prefer growth stocks to maximize total return and then when they're ready to retire they can build an income portfolio. Again, each strategy has pros and cons. What is are your goals, what kind of portfolio do you want on your RRSP? Do you want to hold Canadian or US companies? I'd first build a list of quality companies that meet your criteria to partner with the business. That doesn't mean they're all good buys, as some might be overvalued. Once you have a list of quality companies, then you can focus on valuation, one company at a time.

I'm in the process of reviewing my watchlist, and I'll shrink from what I have today. Part of the rationale to why I have such diverse list was to have different risk / reward exposure to have income growth and maximize total return. However, since I have my own trading models focused on growth and income, I'll narrow down the list with more strict quality aspects, and will change my rules to cease partnership to be more strict as well, and not wait so long. In the end, you need to build a list and have clear entry and exit rules for whatever strategy you pick. Also, you need to decide if you want to invest the $10,000 at once or if you'll dollar cost average and add slowly.


Rod
Hey Rod,

I'm doing the exact same thing with my RRSP, I've had it in some standard mutual fund which has literally done nothing, I probably would've made the same if I stuck it in a savings account. I'm not into investing in stocks but I do have a sense of how people consume products and services so I figured I'd just pick some stocks in a few different industries with a mix of blue chip and growth and maybe one long shot stock

The thing I don't get is why people factor in dividends so much? for 5% as an example you're looking at only $5000 with $100k put in and for a regular person we're usually putting in no more than a few thousand so what is a yearly dividend of a few hundred dollars going to do? Is it not better to just focus on a stock that will provide a better capital appreciation since that will make a much bigger difference in the long run? The way I see it while doing my research is I want a company that will grow in capital appreciation and I look at the dividends as a gravy on top. If i get it's great, if not that's fine too.

Appreciate you taking the time to answer questions on some of technical things... it helps with the research
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Any recession proof stocks or even betters, stocks that will get some boost if people start defaulting on loans, etc. in the US? I read the subprime auto loan industry in the US is a ticking time bomb but it's nothing compared to the 2009 subprime on r/e of course.
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dpacto wrote:
Jan 23rd, 2018 10:50 am
Hey Rod,

I'm doing the exact same thing with my RRSP, I've had it in some standard mutual fund which has literally done nothing, I probably would've made the same if I stuck it in a savings account. I'm not into investing in stocks but I do have a sense of how people consume products and services so I figured I'd just pick some stocks in a few different industries with a mix of blue chip and growth and maybe one long shot stock

The thing I don't get is why people factor in dividends so much? for 5% as an example you're looking at only $5000 with $100k put in and for a regular person we're usually putting in no more than a few thousand so what is a yearly dividend of a few hundred dollars going to do? Is it not better to just focus on a stock that will provide a better capital appreciation since that will make a much bigger difference in the long run? The way I see it while doing my research is I want a company that will grow in capital appreciation and I look at the dividends as a gravy on top. If i get it's great, if not that's fine too.

Appreciate you taking the time to answer questions on some of technical things... it helps with the research
What will provide capital appreciation is earnings growth (or revenue growth / cash flow growth for typical growth companies). So you buy their earnings / revenue / cash flow growth potential. Capital appreciation / dividends are a consequence.

Total return = Capital appreciation + dividends. In 2001 or 2008, dividends allowed me to buy great companies at a deep discount. Also, if I live of dividends, I never need to sell my shares to meet my income needs. That's perpetual growing income. Don't need to care if a bear market is coming when I retire or having to put a portion in bonds. It's just one strategy.

Capital appreciation is just part of total returns, the same way that dividends is just part of your total returns. If a stock doesn't pay dividends, then it's probably a growth stock, which I personally find hard to evaluate and the market is typically not forgiving when they slow down that growth (which will happen eventually).

So it's just not a 5% yield or $500 in $10,000. It's $500 that will keep growing regardless of the economy or if the company faces challenges. It's a predictable yield for your portfolio that helps one to plan when they can retire - a lot harder exercise to do based on liquidating shares for capital appreciation because we don't know if capital appreciation will be there at end of year, but dividends are very likely to be there if quality factors from income statement are in place.

A comprehensive portfolio should have dividend growing stocks (that helps to compound gains when the market is down and drags these stocks even though they might be doing fine) and growth stocks.

Nothing wrong with a port focused on growth stocks only, but if there's a recession next year, then that growth won't be there, while a diversified portfolio of dividend growers allow the dividends to continue to flow, like we always had in every recession. Different strategies for different goals, and I think there's value combining them all.


Rod
Build a comprehensive portfolio based on Investing and Trading strategies. Check out these threads and join the discussion:

Investing strategy based on dividend growth

Trading strategy based on Graham principles.
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alanbrenton wrote:
Jan 23rd, 2018 10:52 am
Any recession proof stocks or even betters, stocks that will get some boost if people start defaulting on loans, etc. in the US? I read the subprime auto loan industry in the US is a ticking time bomb but it's nothing compared to the 2009 subprime on r/e of course.
Consumer staples and utilities. People still need to buy toilet paper, food and heat / light their houses / condos.


Rod
Build a comprehensive portfolio based on Investing and Trading strategies. Check out these threads and join the discussion:

Investing strategy based on dividend growth

Trading strategy based on Graham principles.
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rodbarc wrote:
Jan 23rd, 2018 11:07 am
Consumer staples and utilities. People still need to buy toilet paper, food and heat / light their houses / condos.


Rod
So you think interest rates will not be creeping up so much Rod to be investing in utilities?

Also, which particular stock, P&G?
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rodbarc wrote:
Jan 23rd, 2018 11:05 am
What will provide capital appreciation is earnings growth (or revenue growth / cash flow growth for typical growth companies). So you buy their earnings / revenue / cash flow growth potential. Capital appreciation / dividends are a consequence.

Total return = Capital appreciation + dividends. In 2001 or 2008, dividends allowed me to buy great companies at a deep discount. Also, if I live of dividends, I never need to sell my shares to meet my income needs. That's perpetual growing income. Don't need to care if a bear market is coming when I retire or having to put a portion in bonds. It's just one strategy.

Capital appreciation is just part of total returns, the same way that dividends is just part of your total returns. If a stock doesn't pay dividends, then it's probably a growth stock, which I personally find hard to evaluate and the market is typically not forgiving when they slow down that growth (which will happen eventually).

So it's just not a 5% yield or $500 in $10,000. It's $500 that will keep growing regardless of the economy or if the company faces challenges. It's a predictable yield for your portfolio that helps one to plan when they can retire - a lot harder exercise to do based on liquidating shares for capital appreciation because we don't know if capital appreciation will be there at end of year, but dividends are very likely to be there if quality factors from income statement are in place.

A comprehensive portfolio should have dividend growing stocks (that helps to compound gains when the market is down and drags these stocks even though they might be doing fine) and growth stocks.

Nothing wrong with a port focused on growth stocks only, but if there's a recession next year, then that growth won't be there, while a diversified portfolio of dividend growers allow the dividends to continue to flow, like we always had in every recession. Different strategies for different goals, and I think there's value combining them all.


Rod
Ok thanks for that. Yes i did not factor in getting enough dividends so you don't have to sell your shares. I keep comparing it to real estate since that's what I have experience with but real estate is illiquid for the most part.
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alanbrenton wrote:
Jan 23rd, 2018 11:08 am
So you think interest rates will not be creeping up so much Rod to be investing in utilities?

Also, which particular stock, P&G?
Actually started a position in that today... investment acct. :)
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georvu wrote:
Jan 23rd, 2018 2:08 pm
Actually started a position in that today... investment acct. :)
I love Charmin. No other bathroom tissue is manufactured like a tank. Even my strategy professor said Tide is the best detergent out there (I guess for those with no skin sensitivities). P&G Canada is smart, they are the ones who keep giving out coupons so price-sensitive consumers will buy the products while those who don't care, just keep coming back for more.

Too bad I have the Toto washlets now, haha, so less Charmin consumption. I even use those when I have colds instead of the facial tissue that just disintegrates upon sneezing.
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Hi Rod,

Do you think DFN and DFN.PR is a good all in one dividend fund? If not, can you recommend some fund or etf? or can you cut down your list to 5 stocks?
It's so hard for me to build a 20 stocks portfolio. Thanks.
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Hi Rod can you tell me what you think of magna international stock and it's growth? Is this a company you would like to "partner" with

Also from your graphs what does the white line represent. Does it represent the dividends paid out? This a increasing slope means that they increased dividends?

Thanks
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Oct 17, 2015
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Rod
Thank you so much for the detailed post backed by examples and data. Its true that one is expected to pickup blue chips for dividend returns which in itself is likely to to provide decent capital appreciation, something I did not factor at all in my calculations. Thanks again. Much obliged.
rodbarc wrote:
Jan 23rd, 2018 10:21 am
Total return is dividend return + capital appreciation. The less than 4% is considered as a "fixed salary" that you get regardless of what the market does. It generates cash that can be reinvested or spent. Buying quality companies when attractively priced takes care of the capital appreciation. When you combine both, you do better than index funds, because with index you don't control the portfolio (you buy good and bad companies), you don't control valuation (you pay market price for everything) and you don't pay MER.

Also, don't let the low yield to fool you. With an approach based on dividend investing, it's not just a less than 4% yield. It is a dividend stream that starts at , say 3% and grows, say, at 7% per year. Buy $100,000 of it and the year one dividend is $3,000. Compound the 7% growth for 30 years and the year 30 dividend is about $24,000. if the stock still yields 3% you've got a big capital gain. If it now yields 6% at year 30 because interest rates went up, the stock part is you've still got a quadruple in capital gain. The key is to monitor the safety of the dividend and the growth rate and trade into something else with better prospects if it no longer meets your goals for dividend and growth. Remember, in the end, for dividend growing companies, earnings drive stock price.
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jerryhung wrote:
Jan 25th, 2018 10:25 am
just like that, CJR.B is almost $9 again (from $8 on 1/19)
$8.83 bid fwiw
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rodbarc wrote:
Jan 17th, 2018 10:19 pm
I'm not worried, because they continue to have a decent free cash flow rate. Remember, dividends come from cash, not earnings, so their P/E has no effect into their payout ratio - you can have a company with positive earnings go bankrupt and you can have a company with negative earnings to continue afloat, so it's is all about cash flow. For this last quarter, adjusted free cash flow was $0.597 per common share, and that's in line with their dividend goal, which is to pay an annualized rate in the range between 60% and 85% of adjusted free cash flow per share. The P/E 30 simply tells the market that Cineplex is trading at a higher multiple that is questionable, but that has no impact in their ability to stay afloat or sustain dividends. From a cash perspective, under Cineplex’s Credit Facilities, which mature in April 2021, Cineplex has a $150.0 million Term Facility and a $475.0 million Revolving Facility which is available to finance acquisitions, new construction, media growth projects, working capital and dividends. With the $75 million increase in the Revolving Facility during the third quarter, as at September 30, 2017, Cineplex had $127.0 million available on the Revolving Facility. As defined under the Credit Facilities, as at September 30, 2017, Cineplex reported a leverage ratio of 2.05x as compared to a covenant of 3.50x.

Cineplex stock was mostly hurt by weak boxes releases, specially 2 quarters in a row, which hasn't happened in years. The North American industry has delivered record-breaking results for 4 of the past 5 years, and also the first half of 2017 - that helped to push valuation higher, so the recent decline as a result of softer quarters doesn't translate to Cineplex being weak financially. This was cyclical, and as record-breaking releases come back this year, associated with growth from their diversification and acquisitions, this will be seen as another opportunity to add more at a very attractive valuation.


Rod
I was reading an article on motley fool that apparently their payout is like 150%?

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